Pleasing Sallie Mae

Since 1980 the average tuition at four-year colleges (in inflation-adjusted dollars) has doubled. Median income for families, however, has not kept pace, increasing just 12 percent over the same period. Student loans help families fill the cash gap. And a powerful industry has grown up to handle the loan business.

Taxpayers subsidize the private student loan industry through federal guarantees of loans and other financial perks to encourage banks to loan students money. It's a cushy deal for the banks--there is no risk for them, thanks to Uncle Sam. But banks grumble about the fact that the government dictates the terms of these loans. (There is also a separate lending program in which students borrow directly from the government, which the banks hate even more because it cuts into their business.)

In July 1998, when Congress debated the student loan program as part of a package of higher-education legislation, Senator Tom Harkin of Iowa made a modest proposal. Why not cut by 25 percent the origination and insurance fees students pay to secure their loans? The cut would save the average student about $170, which the senator pointed out could buy a lot of books.

The Senate rejected Harkin's amendment by a vote of 56 to 41. And then Congress went on to approve about $1 billion in new taxpayer subsidies for banks. The new subsidies were to assure banks that the cost of new, lower interest rates approved as part of the bill would not come out of their pockets.

Fast-forward to the fall of 1999. This time, the student loan industry decided that it was tired of interest rates being linked to government securities. Another lobbying campaign on Capitol Hill won the banks what they wanted: a link between loans and commercial interest rates. The U.S. Department of Education estimated that the change is worth $1.7 billion in profits and subsidies for lenders, including $692 million for Sallie Mae
alone, which controls nearly 40 percent of the market nationally. (Sallie Mae was set up by the government in 1972 as the Student Loan Marketing Association--SLMA. In 1997 it was reorganized as SLM Holding Corporation, a private company, and this summer it was renamed USA Education.)

Sallie Mae has given $562,300 to candidates and parties since 1997, 60 percent to Republicans, according to the Center for Responsive Politics. The banking industry as a whole is a source of generous campaign contributions, giving $43.7 million to candidates and parties since 1997 alone, 65 percent to Republicans.

The student loan battles are not over. In this year's budget, President Bill Clinton proposed shaving $2.3 billion off the $6 billion the government pays in subsidies to banks for student loans, an enormous savings for taxpayers. Representative William Goodling, a Pennsylvania Republican who is chairman of the House Committee on Education and the Workforce, declared Clinton's proposal "dead on arrival." He also had plenty to criticize about a more recent Clinton-Gore plan to lower interest rates on direct student loans, which the administration estimates would save students and parents $600 million. Who was Goodling's top donor in his last election? USA Group, which is owned by USA Education, i.e., Sallie Mae.

Influencing student loan terms is not the only way that money in politics affects those in college. The credit card industry targets students with glossy ads and mailings, enticing them with the prospect of buying things they can't afford, while lobbying Congress to crack down on students and others who find themselves in bankruptcy. So as the class of 2004 unpacks, settles into the dorms, and buys books for the semester, money-power in Washington not only peddles more debt on less favorable terms; it provides a cynical lesson about how government works.

About the Author

Nancy Watzman is an investigative journalist and a Denver-based consultant to the Sunlight Foundation. Her work has appeared in numerous publications, including The Nation, The New Republic, and Harper's Magazine.